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Partnership - Meaning

While starting a business, one may form a sole proprietorship when the business is small. The problem with this kind of business is that it cannot grow beyond a certain limit. This is because a sole proprietorship will not be readily sponsored by banks other sources of finance.

Also the amount of money that the sole proprietor can contribute to the business “alone” is not very high. Besides this, the sole proprietor has to take wise decisions in running the business. If he is unable to do so, the business will not be very successful and will not grow.

A sole proprietor might be an expert at marketing or might be technically strong. But it is not likely that he will be strong in all the fields that are important for making wise and successful business decisions.

Partnership is combination of two or more proprietorships, who have agreed to pool their resources for a common objective and with a view to earn profit. Partnerships are established pursuant to partnership deed between the partners and they can be formed for particular time duration or particular project and according to the will of the partners. There cannot be more than 20 persons in partnership firm and with the admission or cessation of any partner, the partnership dissolves.

This partnership deed may be oral or in writing. However it is wise to make sure that the partnership deed is in writing so that future conflicts may be resolved. More about the partnership deed shall be explained ahead.

Characteristics of a Partnership

1. Two or more members: At least two members are required to start a partnership business. But the number of members should not exceed 10 in case of “banking business” and 20 in case of “other business”.
   
   
2. Lawful business: The partners should always carry on any kind of lawful business, they cannot indulge in illegal business like smuggling, black marketing, etc..
   
   
3. No separate legal existence: Partnership firms are no legal entities as opposed to companies, who have their separate legal existence, partnerships are not recognized in law at their own, they are recognized by their partners. The partnership firm is just a name for the business as a whole. If someone wants to sue the firm, it has to sue the partners.
   
   
4. Eligibility of partners: Since individuals join hands to become partners, it is necessary that they must be “competent” to enter into a partnership. Thus, minors, lunatics and insolvent people are not eligible to become partners. However, a minor can be admitted to the benefits of partnership i.e., he can have a share in the profits only.
   
   
5. Sharing of profits: The main objective of every partnership firm is to make and share the profits of the business. In the absence of any “agreement” for profit sharing, it should be shared “equally” among the partners. Suppose, there are two partners in the business and they earn a profit of Rs.20,000. They may share the profits equally i.e., Rs.10,000 each or in any other agreed proportion, say one forth and three fourth i.e. Rs.5,000/- and Rs.15,000/-
   
   
6. Unlimited liability: The biggest disadvantage of partnership is that the liability of partners in a partnership is unlimited. This means, if the assets of the firm are insufficient to meet the liabilities, than the personal properties of the partners, if any, can be utilized to meet the business liabilities. Suppose, the firm has to make payment of Rs.30,000/- to the creditors. The partners are able to arrange for only Rs.20,000/- from the business. The balance amount, of Rs.10,000/- will have to be arranged from the personal properties and assets of the partners.
   
   
7. Voluntary registration: Though the Partnership Act provides for registration but had not made it mandatory to register a partnership firm. However, if opts not to register your partnership firm than you will be deprived of certain legal benefits, therefore it is always desirable to register the firm. The various effects of non-registration are:
   
   • Your firm cannot take any action in a court of law against third parties for settlement of claims.
   • In case there is any dispute among partners, it is not possible to settle the disputes through a court of law. Note: Registration is voluntary in most states. However it would be best to check up the rules of your state to be sure. In states like Maharashtra, registration is almost compulsory.
   
   
8. Restriction on transfer of interest: No partner can sell or transfer his share or part in the firm to any one without the consent of the other partners. For example, A, B, and C are three partners .If “A” wants to sell his share to “D” as his health problems prevent him from working, he cannot do so until B and C both agree.
   
   
9. Continuity of business: A partnership firm comes to an end at death, lunacy or bankruptcy of any partner. Even otherwise, it can stop it’s business at the will of the partners. At any point of time, the partners may decide to end their partnership.

Types of Partners

Depending on the reason behind which a particular partnership is made, partners may be of different types. To understand this better, consider the following:

1. Active Partners: The partners who actively participate in the day-to-day operations of the business are known as active partners. They contribute the capital and are also entitled to share the profits & losses of the business.
   
   
2. Dormant Partners: Those partners who do not participate in the day-to-day activities of the partnership firm are known as dormant or “sleeping partners”. They only contribute capital and share the profits or bear the losses, if any.
   
   
3. Nominal/Outside Partners: These partners are persons, who hold a particular goodwill as to their character or work and to allows the firm to use this goodwill by showing them as the partner in their firm. These partners neither have any real interest in the business of the firm nor they invest any capital, or share profits or take part in the business of the firm. However, they do remain liable to third parties for the acts of the firm.
   
   
4. Minor as a Partner: Legally only a person who is or above the age of 18 can become a partner in the firm but in special cases, a minor can also be admitted as partner with certain conditions. A minor can only share the profit of the business. In case of loss his liability is limited to the extent of his capital contribution for the business.

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